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Auntie's accountant

Britain's most important global brand turns over £3bn a year, but two-thirds of it comes from an archaic tax on TVs. FD John Smith explains why that system should continue at today's more commercial BBC.

There’s a company based in London which is responsible for spreading the UK’s best-known brand around the world. This company turned over £514m last year, although its pre-tax profit was just £6.8m. But nobody minds. In fact, most people connected with this company are probably secretly pleased that its supplier is milking it dry.

That’s because its supplier is also its parent organisation. The company is BBC Worldwide, and last year it generated £82m net cashflow for the British Broadcasting Corporation. That’s enough to pay for Radios One and Two for a year; almost enough to cover Radio 4’s annual costs; would fund BBC 1 for just over a month; or finance licence fee collection for 37 weeks. The corporation’s finance director, John Smith, sees Worldwide as a business to rival the biggest content marketing organisations in the world – even if its contribution to the corporation is dwarfed by the £2bn-plus that comes in from the licence fee.

More on that later – as FD, Smith is more concerned than most by the current round of attacks on the corporation’s status and the validity of its government-backed revenue stream. In the meantime, commercial, or should we say ‘business-like’, aspects of the BBC are a vital plank in his financial strategy.

BBC Worldwide is central to that plan. ‘One of the things that we are trying to do, with some success, is identify those programme brands which come from the BBC production machine which have global exploitation potential,’ he says. ‘This is an idea basically copied from Disney.’ Merchandising and spin-offs can yield even more cash than programme sales, and with a brand like Teletubbies raking in £90m in global revenues since it was first screened, who can argue with that sort of logic?

The Birt years

If this seems unduly Machiavellian coming from the BBC, then it’s worth bearing in mind that the corporation has gone through some pretty sweeping changes in the past decade, many of which have been driven by Smith and his fellow bean-counters. Of course, the real Aunt Sally at Auntie Beeb in the 1990s was Director General John Birt, who drew flak from ever corner – not least from his own staff – thanks to his wholesale reforms.

‘John’s reforming mission when he came in at the very start of the 1990s was all about discipline, financial control, reform of management, and introduction of the thing which became known as producer choice, the internal market,’ explains the FD. ‘Remember, in the early 1990s, the BBC almost breached its borrowing limits, it had a financial crisis known as the ‘missing millions’.

Phase one of the new order was to eradicate waste – £80m was cut from the overhead base. More controversially, the senior managers also launched an attack on the facilities of the BBC, which under the Broadcasting Act 1990 has to buy in 25% of its programmes from independent producers. By implication, this meant cutting 25% of the in-house production facilities.

Much to the annoyance of the creative brains at the BBC, they also insisted on bringing in profit and loss accounts, balance sheets and cash-flow management at the business unit level. ‘These had never existed before, so quite a lot of accountants were recruited,’ Smith recalls. ‘The drama department, which spent over £200m a year, had not one single qualified person in it at all.’

The internal market

This process allowed BBC management to introduce the internal market in 1993. ‘We used the internal market to keep ratcheting prices down and down, and to keep matching the efficiency levels of the external market place,’ says the FD. Result: production prices have fallen by an average of 44%.

The flip side of that, of course, is that there’s now a massive layer of administrators in the BBC, a grouping that Greg Dyke has vowed to remove since taking the Director General’s post earlier this year. Birt had to put up with years of constant attacks for putting in the beancounters, but the current beancounter-in-chief claims not to have suffered from the mudslinging. Surely he’s one of the chief bogeymen for the creative types?

‘I hope that’s not true; I know what you mean, and theoretically you must be right. But, in practice, I think you’re wrong, because I hope that I have made such efforts to build good relationships with them all that they don’t really think that,’ Smith answers.

Those same people, ‘the people with a double first who come to the BBC because they want to work on television’, do often make life difficult, and Smith repeats the old BBC line that ‘a decision from the BBC board is just the start point of a debate’. Recent decisions, to cut the administrative burden and reassign spending to programme making, may perhaps gain quicker assent from the creative people, but Smith is eager to place the current changes in the context of the Birt era. For him, it’s all part of the same process.

‘While we have pressurised our direct costs down fantastically by putting this machine in place, and it definitely works, now we can move on a level and cut the administration,’ he insists. ‘If anyone had said to me in 1993, ‘do you think this number of accountants will stay?’, I would have said definitely not.’And the message to these creative types about the future? ‘When SAP is in and operational, and when the service level agreements from the outsourcing come to their full fruition, the cost of our whole accounting, finance, back-office will halve,’ Smith says. To FDs with bad experiences of SAP (‘Everyone knows what SAP is like to introduce: very difficult. But I have absolutely no hesitation that it’s the right thing to do,’ Smith says) this might sound a bit hopeful, and it’s not exactly the sort of message creatives lap up. But Smith is committed to meeting Greg Dyke’s target of reducing administrative costs from 24% to 15% of the corporation’s overheads, and ploughing the money straight back into programming.

Outsourcing

Smith has certainly taken steps to ensure that his own line responsibilities lead the way on rationalisation. Most of the finance function is in the process of being outsourced thanks to a deal with IT consultancy EDS and PricewaterhouseCoopers. Together, they have formed Media Accounting Services.

He’s incredibly enthusiastic about outsourcing and reels off a list of benefits with a fluency only a true convert could muster: the BBC gains both IT and accounting expertise; there will be a set level of service provision; finance staff who are outsourced will be working in a more dedicated environment, with better promotion opportunities; and, best of all, if MAS can sell its services to other clients, the BBC will get a cut of the profits.

‘Where outsourcing really works is where you can standardise processes,’ Smith points out. The FD admits that forcing all BBC staff to adopt the same expenses management system, for example, will be unpopular – but there’s simply no other way to do it.

These efficiencies, and more to come, have been sanctioned by Chris Smith, the culture Secretary, who has insisted that the BBC must find over £1bn-worth of savings. In light of the increase in the licence fee being fixed at 1.5% (while commercial broadcasters’ revenues are growing at 7%), both making and saving money are imperative.

The fact is, the BBC’s main revenue generator, the £2bn-plus-a-year licence fee, is starting to look like an anomaly. The BBC is allowed to levy the fee under its Royal Charter, a system designed to ensure that the corporation would ‘inform, educate and entertain’ the masses. But, at the start of the 21st century, the ‘entertainment’ bit is well spoken for by commercially-funded rivals.

The corporation’s management acknowledged as much in its response to the report of the Davies Panel (an independent committee headed by Goldman Sachs economist Gavyn Davies) on the future funding of the BBC. The BBC claimed that its news output is essential, as ‘competitive pressures are already driving commercial broadcasters away from thorough and serious coverage’ (a point that Sky, no doubt, would deny), and puts emphasis on the ways that it can offer a multimedia approach to education.

Serving the public

At the heart of this debate is what the BBC is actually for. Public service broadcasting is funded, by definition, by the public. But this is murky territory, especially when commercial stations can bid for BBC programmes:

FD: Why are you so concerned to keep Have I Got News For You? It doesn’t meet any of the public service criteria…

Smith: Oh, definitely it does. It meets all the public service requirements, it means a lot to us. It’s challenging, it’s inventive, its original, it informs as it entertains, it’s impartial…FD: Right, but one could ask a commercial channel, ‘Don’t you produce anything that is challenging, inventive, original and entertaining; and that does not toe the party line?’ And they would say, ‘Of course we do.’ Smith: The point is, it is our programme. We built it, and it’s doing very well, and we want to keep it. FD: But if an ITV channel outbid you in negotiations with the production company, then the public would still see it on a commercial channel.

Smith: That’s absolutely true, and if you’ve got a requirement to buy 25% of your programmes from that source, you going to be in that sort of game.

This exchange is noteworthy because Smith is actually talking like a commercial FD – he wants to keep his big name brands, he’s prepared to shell out to keep them and the actual appearance of quality programming on TV – the prime reason behind a nationally-funded, non-commercial broadcaster like the BBC – is almost immaterial. And this tends to refute a comment he makes earlier in our conversation: ‘It’s not some small commercial point, it’s a big cultural, national, important point that the BBC exists to do things that the market left to its own devices would not do.’

Smith has a risk management angle which partly justifies the BBC’s ongoing investment in non-public service shows: series such as Fawlty Towers, One Foot in the Grave and Blackadder might never have been recommissioned had they been left to the ravages of the market, having been poorly received at first. But this leaves the BBC open to the rigours of ‘talent inflation’ – taking a risk on a star or a programme format in the early, unpopular days, building it up then seeing itself outbid for the lucrative pay-off years.

Smith hopes to bring an FD’s skills to bear on this: ‘In our financial modelling, that is one of the most significant worries. What one wants to do, although it’s not easy, is manage that whole cycle such that over time we get reasonable value and our costs are controlled. The ideal situation is to secure options for it to be recommissioned for as long as we think it is likely to go on for, so we’d get the inflation fixed at the start.’

Advertising

Such are the problems of a relatively fixed income. And advertising, the main source of broadcasting revenue, is explicitly forbidden by the BBC’s charter. ‘We would take shed loads of it,’ boasts Smith. ‘But the total spend on advertising wouldn’t alter materially, so all that would happen is that the advertising cake would be carved up among a wider number of people; so if you were ITV or Sky that would be pretty problematic.’ And direct commercial subscription is out as well – the FD points out that a mandate to provide programming for the nation, for all its minorities and special interests, requires funding from the nation, not just a select group.

The other possible source of funds – the sale of stakes in BBC Worldwide and BBC Resources (which runs all the corporation’s facilities, both for internal producers and the commercial market), which was a route advocated by the Davies Panel, is out of the question. ‘If we sold 49% of it, all we are doing is swapping future potential cash flows for some figure today,’ the FD points out. ‘Apart from anything else, what’s the point of a sudden cash injection into the BBC, which is essentially a spending organisation? What it needs is a sustainable source of cash.’

This is a compelling argument. But the BBC is happy to milk new sources of funding to bolster cash flow. The corporation is in joint ventures with Flextech to run six subscription channels (the UK TV group, including UK Gold and UK Play – only available on cable or satellite, and which carry adverts), and with the Discovery Channel. It is about to start handling sponsorships through a dedicated unit to ensure certain events (like Young Musician of the Year, most definitely part of the public service remit) do not fail. It has set up a new subsidiary to sell the BBC’s technology expertise outside its walls (in the same mould as BBC Resources), and has BBC Training and Development pitching for external customers.

Online activity

Most recently, as this issue went to press, the corporation announced that beeb.com, a Web site subsidiary of BBC Worldwide which does carry advertising (the main site, bbc.co.uk, does not), had spun off to create BBC Ventures – and, in a deal that valued the new company at £240m, had sold a 13.5% stake to US venture capital consortium TH Lee Global Internet Managers.

The sponsorship issue is still the subject of debate, and we didn’t raise it with Smith. But the commercial side of the man comes to the fore when we broach the joint ventures. ‘We take the creative capability of the BBC, and put it into a joint venture whereby the partner brings all of the cash and takes all of the financial risk; but we jointly own what is created.’ And that helps secure cash flows for developing more content in the future.

The FD’s role at the BBC is so politically charged, so vital to the success of the corporation, that Smith can be forgiven for hedging his bets; after all, he’s responding in the best way possible to conflicting currents – public service and revenue generation, popular programming and preserving the cultural edge of the nation. But we end with a fascinating discussion about a topic many FDs would find mundane: property outsourcing.’You get me really excited at this point, I love this topic,’ he bubbles. ‘We are the BBC, for the nation, broadcasting to the nation, reflecting the entire nation, and all the buildings are closed, you can’t get in.’ Smith would love to perform some financial magic with the £450m, 522-property BBC estate – bundling the freeholds and leases, then getting a external company to buy them and manage their redevelopment. The corporation could then use its buildings, which currently occupy either the best locations available, or out-of-the-way nooks and corners useless for presenting the BBC to the people, much more flexibly.

Ideally, he’d open up virtually all of the BBC’s sites to the public – get them using free Internet kiosks, watching programmes being made, buying merchandising in the presence of celebrities, and generally using the BBC as a focal point for communities in towns and cities. As a marriage of financial acumen and public service, it’s a great idea. And in the end, it’s the sort of project that might just be typical of the BBC of the future.